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Can Saudi Arabia really afford to wage an oil price war?

It was the last thing a slowing global economy needed.  With the coronavirus pandemic hammering international travel, supply chains and production, Saudi Arabia delivered another shock to the system by declaring an oil price war.  On March 6, having failed to convince Russia to agree to deep production cuts aimed at shoring up crude prices against the…

Can Saudi Arabia really afford to wage an oil price war?

It was the last thing a slowing global economy needed. 
With the coronavirus pandemic hammering international travel, supply chains and production, Saudi Arabia delivered another shock to the system by declaring an oil price war. 
On March 6, having failed to convince Russia to agree to deep production cuts aimed at shoring up crude prices against the demand destruction unleashed by coronavirus, Saudi Arabia-led OPEC retaliated by announcing it would start pumping crude with abandon.
The next day, the kingdom lowered the price it charges for oil. Come March 9, the markets delivered their verdict. Oil prices crashed 30 percent at one point – the biggest one-day drop since the 1991 Gulf War.
Though some of those losses were pared, announcements of pending production boosts next month by the kingdom and other Gulf producers ensured oil prices had their worst week since the 2008 financial crisis.
The price war is a gamble for the kingdom, one that could either pay off or land it in a deep hole.
Dramatically lower oil prices set up Saudi Arabia, which can produce oil more cheaply than any other country, to steal market share: both from the world’s second-biggest oil producer-Russia-as well as higher-cost United States shale oil producers.
But analysts say it could come at a cost to Saudi Arabia and the ambitious plan of its de facto leader Crown Prince Mohammed bin Salman (MBS), to break the kingdom’s oil-dependence and set it up for a more prosperous future.
A transformation in trouble
Crude accounts for roughly 80 percent of Saudi Arabia’s revenues, and that level of fossil fuel dependence comes with huge drawbacks.
As oil prices rise and fall, so too do the kingdom’s fortunes, which can stall plans and force tough spending choices.
The future is also moving against oil, with the Paris Climate Agreement spurring more governments to reduce emissions and petroleum products like plastic raising environmental alarms.
The kingdom needs to diversify its economy, and soonest. But that is easier said than done. Overdependence on any commodity for export effectively salts the earth where other productive sectors could take root.
Vision 2030 seeks to spring the kingdom from this trap by reinvesting fossil fuel wealth into sustainable industries of the future, shrinking a bloated state sector, and creating a thriving, diversified private sector to employ the kingdom’s youthful workforce.
And the government does not see itself doing all of this alone. A successful transformation also hinges on convincing investors, both foreign and domestic, to buy into MBS’s vision.
On many counts though, the blueprint for transformation was struggling even before Riyadh fell out with Moscow.
“Vision 2030 was already lagging on most of its interim targets for 2020,” Laura James, senior Middle East analyst at Oxford Analytica, told Al Jazeera.
A cornerstone of raising cash to reinvest into other sectors was the much-hyped initial public offering (IPO) of Saudi state oil giant Aramco.
As it neared its delayed debut late last year on Riyadh’s Tadawul stock exchange, an attack on Aramco’s facilities in September reminded investors of the geopolitical risk festooning the company and its operations.
After failing to attract sufficient international interest, MBS pressured wealthy Saudis to step up and buy a piece of the company. The IPO raised a record $29.4bn, effectively valuing the firm at $1.7 trillion- well shy of the $2 trillion MBS had originally sought.
Now, the oil price war is hammering shares of Saudi Arabian Oil Co -as Aramco is officially known.
The stock fell 12 percent last week and continued to slide on Sunday, after Aramco announced it is cutting capital spending this year in response to coronavirus, and reported a 21 percent decline in 2019 net profits due to lower oil prices.
On Monday, Aramco is due to hold a webcast to discuss its full-year results.  Company executives could be grilled over whether pumping crude full-throttle is in the best interests shareholders. 
Another Vision 2030 metric – foreign direct investment (FDI) in the kingdom- has also been lacklustre. Though it recovered to $3.2bn in 2018 having not even cracked $2bn the previous year, FDI was still way down from the $8.1bn achieved in 2015 and a mere fraction of the $29.2bn the kingdom attracted in 2010, according to the United Nations Conference on Trade and Development.
Growth in the kingdom’s non-oil private sector is another benchmark.  It was looking promising, until it started slowing in December and continued to decelerate in January. February saw the slowest growth in two years, as output and new orders fell, thanks to disruptions spawned by the coronavirus.
Now, the fiscal stress of an oil price war could make non-oil sector growth even harder to achieve.
Austerity on tap
The kingdom has healthy foreign exchange reserves, roughly $500bn, to ride out a price war, and it does enjoy the lowest production costs among all oil producers.
The Saudis “can still turn-out a profit at these low oil prices, at least for a time,” Tarik Yousef, director at Brookings Doha Center, a nonprofit public policy organization, told Al Jazeera.
Balancing its budget, however, is another story. 
The International Monetary Fund reckons the kingdom needs oil to fetch around $83 a barrel to balance its state budget.
Global benchmark Brent crude last traded at $33.84 a barrel on Friday.
Goldman Sachs reckons that should oil prices average $30 a barrel over the next two quarters and the kingdom boosts output by 10 percent, its budget deficit could swell to 12 percent of gross domestic product (GDP) this year -nearly double its fiscal deficit target.
That would increase the government’s financing requirement by $36bn.
There could be a silver lining. Goldman estimates that if oil prices recover to $60 a barrel by the end of 2021, the kingdom’s budget deficit could narrow to less than 2 percent of GDP by 2022.
But if oil prices only recover to $50 a barrel by the end of next year, Goldman sees the budget deficit remaining “wider for longer, implying an additional $63bn in funding requirements” over the next two years.
More drama
Austerity measures may have been in the cards before the kingdom declared a price war, as Riyadh prepared for slowing oil demand in the face of coronavirus.
State agencies were asked to submit proposals for slashing 20 to 30 percent from their 2020 budgets before the kingdom fell out with Russia, Reuters News Agency reported, citing sources. One source said salaries would not be touched, but projects and the awarding of new contracts could be delayed.
“With salaries largely protected, the impact could be on capital expenditure, which will have a knock-on impact on the private sector and likely hinder diversification efforts,” said James.
Shielding salaries helps maintain loyalty, which is important for any ruler, especially one surrounded by intrigue.
The price war was not the only Saudi drama unfolding while the alliance between OPEC and Russia was collapsing.
Two of the royal family’s most influential members, Prince Ahmed bin Abdul Aziz, the youngest brother of King Salman, and Mohammed bin Nayef, the former crown prince and interior minister, were reportedly being detained in Riyadh. Both men are seen as legitimate contenders for the throne, sparking speculation that at the very least, MBS was making a move to consolidate his power.
The price war “threatens stability at a time where MBS is already facing political pressure and possibly threats from within the royal family as evidenced by the recent arrests,” said Yousef.
Which makes pulling off an economic transformation like Vision 2030 that much harder, say analysts. “It’s tougher for oil-dependent countries that need higher prices to fund their budgets,” Jim Krane, Wallace S Wilson Fellow in Energy Studies at Rice University’s Baker Institute for Public Policy, told Al Jazeera.
“If they cut spending too much, they could have a rebellion on their hands. Saudi Arabia is vulnerable in this respect.”
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Saudi Arabia rebuked at UN over Jamal Khashoggi killing, abuses |NationalTribune.com

Dozens of nations condemned Saudi Arabia before the UN Human Rights Council on Tuesday over serious violations and demanded accountability for the murder of journalist Jamal Khashoggi. In a relatively rare rebuke of the oil-rich kingdom before the UN’s top rights body, Denmark’s Ambassador Carsten Staur read a statement on behalf of 29 states demanding…

Saudi Arabia rebuked at UN over Jamal Khashoggi killing, abuses |NationalTribune.com

Dozens of nations condemned Saudi Arabia before the UN Human Rights Council on Tuesday over serious violations and demanded accountability for the murder of journalist Jamal Khashoggi.
In a relatively rare rebuke of the oil-rich kingdom before the UN’s top rights body, Denmark’s Ambassador Carsten Staur read a statement on behalf of 29 states demanding justice for Khashoggi, a Washington Post columnist who was killed in the Saudi consulate in Istanbul in 2018 by an assassination team.
In the third joint statement to the council targeting Riyadh since the killing, the mainly European countries renewed a call for “transparency and holding all those responsible accountable”.

“We stress the need for full accountability and transparent prosecution of those involved in the killing of Jamal Khashoggi,” said Germany’s Ambassador Michael Freiherr von Ungern-Sternberg.
The Saudi journalist was lured into the Saudi consulate to handle marriage paperwork. Within minutes, the one-time royal insider turned critic was strangled and his body dismembered, according to Turkish and US officials.
A Saudi court this month handed lengthy jail terms to eight unnamed defendants and overturned five death sentences, in a ruling harshly condemned by Khashoggi’s fiancee and UN rights expert Agnes Callamard, the special rapporteur on extrajudicial killings.
Callamard, who like the CIA had previously linked Crown Prince Mohammed bin Salman (MBS) to the killing, decried that top officials who allegedly ordered the murder walked free.
Torture, disappearances
Tuesday’s statement, which was hailed by several human rights groups, also highlighted a wide range of other serious rights violations in Saudi Arabia.
“We remain deeply concerned by reports of torture, arbitrary detention, enforced disappearances, and detainees being denied access to essential medical treatment and contact with their families,” it said.
Staur said the countries welcomed recent reforms such as restricting flogging and the death penalty against minors, but stressed journalists, activists, and others still face persecution, detention and intimidation.
The statement also echoed the criticism voiced by UN rights chief Michelle Bachelet over the “arbitrary detention” of a number of women human rights activists in the country.

She told the opening of the council session on Monday the detained women simply requested to “be empowered to make their own choices, as equals to men”, insisting “they should be released without delay”.
Saudi Arabia’s representative hit back on Tuesday insisting “the detention of any women has nothing to do with their right to exercise the freedom of expression, but for violations of the standing laws”.
“Their rights are fully respected as detainees,” he said, adding they were guaranteed a fair trial.
Tortured and sexually harassed
Saudi Arabia has detained and put on trial a dozen female activists who long campaigned for the right to drive, which was finally granted in the kingdom two years ago.
Some of the activists allege they were tortured and sexually harassed by interrogators. Staur highlighted that at least five women’s human rights defenders arrested in 2018 remain in detention.
“We reiterate our call for the release of all political detainees and are particularly concerned about the use of the counterterrorism law and other security provisions against individuals peacefully exercising their rights,” he said.

Tuesday’s statement also urged dramatic improvements as Saudi Arabia strives to obtain a seat on the 47-member Human Rights Council.
“Council membership comes with an expectation of upholding the highest standards in the promotion and protection of human rights,” Staur said.
Germany, speaking on behalf of the European Union at the United Nations Human Rights Council, decried Saudi Arabia’s “prolonged detentions of women rights defenders”, including Loujain al-Hathloul.
John Fisher of Human Rights Watch denounced Saudi Arabia’s “brutal targeting of defenders and dissidents” and urged the release of the female activists and “others arbitrarily detained”.
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Saudi Arabia tells US it wants fair solution for Palestinians |NationalTribune.com

Saudi King Salman bin Abdulaziz spoke to United State President Donald Trump on the phone, state media reported [File: Bandar Al-Jaloud/Saudi Royal Palace via [AFP Photo] Saudi Arabia’s King Salman bin Abdulaziz told United States President Donald Trump that the Gulf country wanted to see a fair and permanent solution for the Palestinians, which was…

Saudi Arabia tells US it wants fair solution for Palestinians |NationalTribune.com

Saudi King Salman bin Abdulaziz spoke to United State President Donald Trump on the phone, state media reported [File: Bandar Al-Jaloud/Saudi Royal Palace via [AFP Photo]
Saudi Arabia’s King Salman bin Abdulaziz told United States President Donald Trump that the Gulf country wanted to see a fair and permanent solution for the Palestinians, which was the starting point for its 2002 Arab Peace Initiative, the kingdom’s state news agency reported on Monday.
The two men spoke by phone following a US-brokered accord last month under which the United Arab Emirates agreed to become the third Arab state after Egypt and Jordan to normalise ties with Israel.
King Salman told Trump that he appreciated US efforts to support peace and that Saudi Arabia wanted to see a fair and permanent solution to the Palestinian issue based on its Arab Peace Initiative.
Under the proposal, Arab nations have offered Israel normalised ties in return for a statehood deal with the Palestinians and full Israeli withdrawal from territory captured in the 1967 Middle East war.
Saudi Arabia, the birthplace of Islam and site of its holiest shrines, does not recognise Israel.

A history of Arab-Israeli normalisation

However, this month the kingdom said it would allow flights between UAE and Israel, including by Israeli aircraft, to use its airspace.
During the call, Trump told King Salman that he welcomed that decision, and that the two also discussed regional security, a White House spokesman said.
Palestinian issue
Trump’s son-in-law Jared Kushner, who is also a White House adviser, has said he hopes another Arab country normalises ties with within months.
No other Arab state has said so far it is considering following the UAE. Egypt and Jordan normalised ties decades ago.
King Salman’s son, Crown Prince Mohammed bin Salman, and Kushner discussed the need for the Palestinians and the Israelis to resume negotiations and reach a lasting peace after Kushner visited the UAE last month.
The UAE-Israel deal was met by overwhelming opposition among Palestinians who have condemned the move as a “stab in the back”.
On Sunday, leaders of Lebanon’s Hezbollah movement and the Palestinian Hamas group met to discuss the US push for diplomatic normalisation, the movement said.
Hamas chief Ismail Haniya and Hassan Nasrallah, head of the Iran-backed Shia Hezbollah movement, stressed the “stability” of the “axis of resistance” against Israel.

SOURCE:
News agencies

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Saudi Arabia condemns attacks by Yemen’s Houthis on Riyadh |NationalTribune.com

Saudi Arabia’s cabinet has condemned Yemen’s Houthis for targeting the Saudi capital, Riyadh, with eight armed drones and three ballistic missiles, state news agency SPA said in a statement. The statement late on Tuesday called the attacks “terroristic acts” that target civilians and threatened the lives of hundreds of people. At least two large explosions…

Saudi Arabia condemns attacks by Yemen’s Houthis on Riyadh |NationalTribune.com

Saudi Arabia’s cabinet has condemned Yemen’s Houthis for targeting the Saudi capital, Riyadh, with eight armed drones and three ballistic missiles, state news agency SPA said in a statement.
The statement late on Tuesday called the attacks “terroristic acts” that target civilians and threatened the lives of hundreds of people.
At least two large explosions were heard in Riyadh near dawn on Tuesday and smoke billowed into the sky.
The Houthis said they had hit the Saudi defence ministry and a military base, while a Saudi-led military coalition said it had shot a missile down, making no reference to targets.
There was no sign of damage to the side of the defence ministry building that is visible from the main road or to any surrounding buildings. The area was quiet on Tuesday evening, with normal traffic flows and no additional security measures.

The Houthis have repeatedly fired on Saudi Arabia during the conflict, but had not targeted Riyadh since late March, when Saudi Arabia said it shot down a missile and two residents were injured by falling debris.
Violence between the two sides has surged after the expiry last month of the six-week ceasefire prompted by the COVID-19 pandemic.
Yemen has been divided between the Saudi-backed government in the south and the Houthi movement based in the north since the Houthis seized the capital, Sanaa, in late 2014 and the Saudi-led coalition intervened a few months later in March 2015.
Since then, tens of thousands of people, mostly civilians, have been killed and millions have been pushed to the brink of famine, in what the United Nations has called “the world’s worst humanitarian crisis”.
Houthi military spokesman Yahya Sarea said in a televised speech that the group fired several missiles and drones, which “pounded” military headquarters and centres in Riyadh, including the defence ministry and King Salman Air Base.
Sarea said attacks were also launched against military sites in the southern Saudi cities of Najran and Jizan.
Saudi-led coalition spokesman Colonel Turki al-Malki also condemned the latest attack on Riyadh saying it was a “deliberate hostile action designed to target civilians”.
The coalition had also shot down three missiles headed towards Najran and Jizan and a number of drones, he said.
The conflict in Yemen is largely seen in the region as a proxy war between Saudi Arabia and Iran.
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